Monday, December 17, 2012

Sellers versus Sell Short Traders determine who is in control of the sell side of the trade. Many traders want to learn how to Sell Short to make profits.

They often assume that the sell side is simply the opposite of the buy side, and that is why so many traders do not make the profits they hoped. There are many factors that make the sell side price and volume action different from the upside.

First stocks are like airplanes, they need lift to move up so lots of volume or buying is needed to maintain price moving upward in a trend.

But to the downside, stocks can and do drop in price with very low volume. Think of an airplane again, when there is no air or lift the plane stalls and falls. As a plane moves upward into the sky, the angle of ascent is critical because if the plane goes beyond the point where air or wind is lifting its wings, it will stall and the stall will be dramatic and swift.

That is now stock prices behave. Without volume and buying going on, there is nothing to hold the price up so if price slips on lower volume it doesn’t always mean that selling short has commenced.

The first move down for a trend is not traders selling short but profit taking by traders who have made a nice profit and have decided to exit the stock. These are savvy institutional investors, wealthy private investors, and fund managers who have decided for a variety of reasons to sell the stock.

Often retail traders mistake this profit taking mode for selling short opportunities only to get thoroughly whacked as smaller funds, investment groups, and less savvy investors and traders “buy on the dip” that is created as the big funds and smart money are rotating out of the stock.

These institutional investors are very careful as they sell out of a stock for profit taking to not disturb price much so they tend to take several weeks to sell out.

This creates the up and down price action you see below. Savvy institutions, funds managers and traders are rotating out while smaller investors are buying the stock “on the dip.”

This is not a good scenario for a retail trader to make profits selling short, because there is insufficient points gain to make decent profits and the risk of a whipsaw trade is very high. This is a high risk trading scenario but many retail traders try to trade these patterns with dismal results.

Chart 1

The TechniTrader® Quite Accumulation TTQA indicator is showing with the gray bars how the institutions are carefully exiting this stock while smaller funds are moving in. Volume also shows that the sell side is more dominant than the buy side.

But the range is only a couple of points, far too small for a retail trader to get in and out with profits to cover expenses.

Other indicators that help you see the institutional profit taking selling, are Flow of Funds and Volume Accumulation. Both expose the weakening upside action. In this stock example the profit takers are in control of price. Flow of Funds are moving out of this stock and the volume is weakening to a distribution pattern rather than an accumulation pattern.

Chart 2

Since this is a sideways action RSI and Stochastic are ideal indicators also to study, and both are showing the lower highs and lower lows of a weakening sideways price action.

Chart 3

So who has been in control of price during this sideways pattern? Not sell short traders, but large lot and institutional funds investors taking profits.

Why are they selling for profit at this price level? Because the stock has hit a yearly high resistance level and so they are rotating out of this stock. They are controlling price by selling incrementally and slowly over time. They know that each time the stock drops to the weak support level, more small funds and small lot investors will rush in to buy on the dip. This is a controlled price pattern that is dominated and ruled by the institutions who are selling for profits.

Chart 4

If you want to be a profitable trader selling short, you must wait for the confirmation of the professional, high frequency, and institutional trader selling short as these are the traders who can drive price down with velocity and momentum.

If you try to sell short during the profit taking and buy on dip period, you will get whipsawed out of trades with little to no profits, and risk a huge loss on a sell short as the stock suddenly moves up rather than down.

Knowing who is in control of price before entering a stock will help guide you as to when to enter, how long to hold, and when to exit.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.

Wednesday, December 12, 2012

Traders tend to think merely in terms of up or down or momentum. What they often fail to consider is who is driving price and why. If a trader understands who is driving price and why they are moving price, then they will be better prepared to anticipate what price will do next. In trading successfully, it is not what happened today in the stock chart that matters as much as what will happen tomorrow, especially for short term traders.

There are 4 positions that are within a stock at any one time:

Traders and Investors buying stock to go long either to swing or intraday trade, or to hold for weeks, months or even years as an investment.

Traders and Investors who are selling the stock to close out their position, either for profit taking or to use the proceeds to buy other stocks.

Traders Selling Short are short term trades based on the anticipation the stock will move down and they will net profits on that move.

Traders Buying to Cover are short term trades to close out a sell short position, either for profit taking or because the trade is going against them.

Each group has its own agenda, time frame, goal or target price, entry order, stop loss, and reason for their purchase or sale of that stock.

Which group or groups dominate determine the energy, velocity, and duration of the short term price action and volume action.

Below is a great example of how the 4 different groups buying and selling alters the price action, volume and energy, angle of ascent and descent, trendline pattern, and entry signal and exit signals. The changes over time as to how price moved in this chart example is directly corresponding to which of the 4 groups above were at any period of time, in control of price or dominating the price action during that period.

Chart 1

As a retail trader, the more you understand about what price and volume action corresponds to which group or groups in control of price, the better you will be able to determine and anticipate what price will do next in the short term. In today’s market the institutions dominate and where, how, when, and why they are buying or selling dramatically alters price movement.

Whenever you are buying a stock or selling short, it is imperative that you also consider who is in control of price at that moment, even if the stock is in a consolidation or platform pattern, because who is in control will govern what direction the stock will take next, how long the move will last, and the potential profits whether you are trading up or down.

Many traders just want to find a stock that is going to move when they are still at the beginner level. But as you advance and gain more experience, you realize that understanding the movement is even more important than finding a stock to trade. Once in a trade, this understanding will help you make wise decisions rather than impulse decisions. The more you understand why price is moving and who is moving price, the better trader you will become.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.

Monday, December 3, 2012

As we discussed in the past 2 weeks, volatility is not a random event. As with everything in the market, there is cause and effect involved. Many traders are surprised by volatility and get whipsawed out of a trade unexpectedly. Understanding the what, when, where, how and why of volatility can help you anticipate and prepare for volatile price action.

We studied “what” is of volatility in week 1, and “why” volatility occurs and “where” it is mostly likely to show up in week 2 of these discussions.

This week we are going to study the “when” of volatility. When can you expect volatility to erupt in price action causing major fluctuations and wildly speculative and unpredictable price action.

Volatility is tied to the collision of diametrically opposed forces:

Dark Pools selling or buying incrementally huge share lots over time.

HFTs, smaller funds, and the Sell Side Market Participant Groups.

Volatility tends to occur at 2 primary locations on a chart:

As a Top is about to commence

As a Bottom is about to commence

Therefore recognizing volatility early allows you to identify a top or bottom early. This means you are able to trade with more knowledge and understanding of who controls price.

Dark Pools have the largest sums of money to invest. Dark Pools are both Buy Side and Sell Side institutions. They can include mutual funds, pension funds, hedge funds, market makers, and banks.

High Frequency Trading Firms have the fastest trading platforms, trading on the millisecond creating huge volume surges. BUT they do not have the vast sums of money at their disposal that the Dark Pools have.

So invariably it may look at first as if the HFTs are controlling price and will maintain the integrity of the trend up or down but in fact, the Dark Pools always have the advantage over the extended period of time. Eventually HFTs will abandon the stock in their constant quest for fast moving stocks.

Dark Pools are so dominant that they are the primary cause of a stock topping or a stock bottoming.

Dark Pools as an example, were rotating out of AAPL months before it reached its final all time high and then collapsed.

Volatility entered AAPL as Dark Pools took advantage of the speculative environment surrounding AAPL, as gurus and recommendation services promised investors that AAPL would go to $1,000.00.

As the Dark Pools sold incrementally, it placed more and more pressure on the downside. Retail traders and independent investors buying, could not keep up with the steady outflow of money from AAPL by Dark Pools, so eventually a top formed and the stock collapsed as retail buyers evaporated and more and more selling started.

Understanding the cause and effect behind volatility is crucial for successful trading and investing in today’s complex market structure. With a full 9 Market Participant Groups in the market today, identifying WHO is in control of price is most important.

When you are able to do so you will earn higher profits, avoid weak trades and whipsaw trades, and will be better prepared for corrections and bottoming action.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.

Wednesday, November 28, 2012

We are continuing our discussion from last week regarding the what, when, how, and why of volatility.

Volatility is not a random event. It is not something that has no foundation, nor is it something that serves no purpose.

Volatility serves a purpose and function that most retail traders do not understand.

Whenever the markets start experiencing high volatility two major forces are at odds. It is like a rip tide that moves underneath the waves of the ocean that you see. A riptide can cause major shifts in the direction, strength, and distance that the regular ocean waves travel. Therefore understanding the rip tide effect in the stock market, is crucial for success in trading any financial market.

It doesn’t matter whether you trade stocks, options, futures, commodities, forex or other trading instruments. Volatility will intervene from time to time.

Why does volatility occur?

Volatility is the collision of two major institutional market participant groups. The most common collision occurs when High Frequency action meets Dark Pool action. These diametrically opposed groups cause most of the volatility in the markets today.

Dark Pools move in silently, hidden in the realm of over-the-counter transactions. Their goal is to buy stock at a specific price range over a long period of time as they acquire stock for a long term hold. They are not hiding from retail traders whom they don’t consider a major factor, but from the HFTs that constantly seek them out with little program robots searching for giant fund accumulation. HFTs then drive price upward, the precise thing the Dark Pools do not want to happen during their accumulation.

Volatility is the dynamic action when HFTs are on one side of the trade while the Dark Pools are on the other side. As an example, Dark Pools may be trying to acquire 25 million shares of XYZ stock. They can’t purchase that much stock all at once, or even over a few days. They must establish a price range and then set an automated formula order processing system in place, which triggers a buy of 100,000 or 500,000 shares ever so often so long as the stock remains within that price range. These orders create a specific footprint on the VOLUME and VOLUME ACCUMULATION indicators such as TTQA and TTVA.

Note: Chaikins Money Flow and Chaikins Accumulation Distribution indicators are not volume based indicators so they do not expose Dark Pool accumulation.

When HFTs are selling short the stock then smaller funds, retail traders, and independent retail investors are either selling in panic mode, or selling short along with the HFTs. HFTs are therefore on the opposite side of the trade of the Dark Pools, who have determined that the stock value has reached their buy point. The result is high volatility which invariably creates the bottom. As HFTs try to sell short the stock, Dark Pools orders are triggering buying within their predetermined price range. Since Dark Pools tend to use a range rather than a specific price to get faster fill over time, volatile price action occurs. This is how most bottoms form and this is why most bottom formations are wide sideways action, with unpredictable up and down intraday and day to day price patterns.

Whenever you see a lot of volatility during a downtrend, be aware that this is probably the riptide effect. Volatility is not random, it is the result of two powerful forces clashing at a specific price range. Bottoms are formed due to this conflict, which then evaporates and turns into a compression pattern that builds the upside energy.

Always be aware of volatility when selling short as the Dark Pools will eventually win the price war. Their buying power is vast and their positions are usually huge.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.

Wednesday, November 21, 2012

Main Article

Trading in the Shadow of the Smart Money
Contributed by Gavin Holmes

Volume Spread Analysis (VSA) is the underlying methodology of the TradeGuider "Smart Money" Tracker. The following examples of how professional activity is clearly visible in all markets and in all time frames, to those trained in VSA.

Volume Spread Analysis (VSA) is a proprietary market analysis method which was conceived by Tom Williams the Chairman of TradeGuider Systems International and former syndicate trader. VSA has its basis on the Richard D. Wyckoff method of analyzing market movement. VSA is utilized in the TradeGuider software to analyze a market by observing the interrelationship between volume, price and spread. This method highlights imbalances between supply and demand.

The TradeGuider "Smart Money" Tracker is unique. Driven by an artificial intelligence engine, this methodology plug in for MetaStock is capable of analyzing any and all liquid markets, in any time frame, and extracting the information it needs to indicate imbalances of supply and demand on a chart. In doing so, TradeGuider is able to graphically show the essential forces that move every market which are supply and demand, cause and effect and effort vs result.

The software works with either real-time or end-of-day modes, and enables users to see when professional money is entering, exiting, or not participating in the market they are trading, empowering clients to make more intelligent, timely, and informed decisions. Volume Spread Analysis (VSA) is a revolutionary concept that can be used on its own or in conjunction with other methods as decision support. The system combines ease of use with unique supply and demand analysis not found anywhere else. The extensive Expert System has an innate understanding of market dynamics combined with volume, which means that it is capable of analyzing supply and demand in any liquid market.

The indicators are displayed automatically on the chart. There is no configuration, no setting of parameters, and no optimization. Tradeguider's belief is that if a system requires optimization to make it work, then the base methodology cannot have been sound in the first place, since the process of optimization is used to cover up a whole range of flaws in the original analysis method(s). Tradeguider concepts are robust and can be applied to any time frame, with consistent results. The sophisticated Expert System is augmented by a novel set of proprietary tools, which ensure that any trader or investor can immediately follow the footsteps of the "Smart Money."

While volume in trading is not a new concept Tom Williams, who invented VSA, was a syndicate trader who could see the markets were manipulated and the key to unlocking the truth was in the relationship between the volume, the range or spread of the bar and the closing price. Tom Williams spent many years studying the concepts of Richard Wyckoff.

Richard Wyckoff was a trader during the 1920 and 30's. He wrote several books on the Market, and eventually set up the "Stock Market Institute" in Phoenix. "At its core, Wyckoff's work is based on the analysis of trading ranges, and determining when stocks are in "basing," "markdown," "distribution," or "markup" phases. Incorporated into these phases are the ongoing shifts between "weak hands" (public ownership) and "composite operators," now commonly known as "Smart Money." To find out more about Richard Wyckoff this website is worth visiting.

Tom returned to the United Kingdom from Beverley Hills in the early 1980's having made his fortune and began to investigate if it were possible to computerize the system he had learned as a syndicate trader, and so began the evolution of Volume Spread Analysis. Together with an experienced computer programmer Tom carefully studied many thousands of charts to recognize the obvious patterns that were left when professional or smart money was active. This methodology although simple in concept took many years to write and is now taught as a methodology combined with the software called TradeGuider.

Volume Spread Analysis seeks to establish the cause of price movements. The 'cause' is quite simply the imbalance between Supply and Demand or strength and weakness in any liquid market, which is created by the activity of professional operators or "Smart Money." If you use the TradeGuider software you will see that it does an excellent job of detecting these key imbalances for you, taking the hard work out of reading the markets and enabling you to fully concentrate on your trading.

The significance and importance of volume appears little understood by most non-professional traders. Perhaps this is because there is very little information and limited teaching available on this vital part of technical analysis. To use a chart without volume is similar to buying an automobile without a gasoline tank.

For the correct analysis of volume, one needs to realize the recorded volume information contains only half of the meaning required to arrive at a correct analysis. The other half of the meaning is found in the price spread. Volume always indicates the amount of activity going on, the corresponding price spread shows the price movement on that volume. Many traders believe you cannot analyze volume in the FOREX markets because it is unavailable, but we will show you how TradeGuider proprietary system can achieve something that most traders thought was not possible. More about this later.

Some technical indicators attempt to combine volume and price movements together. Rest assured this approach has limitations, because at times the market will go up on high volume, but can do exactly the same thing on low volume. Prices can suddenly go sideways, or even fall off, on exactly the same volume! So, there are obviously other factors at work.

Price and volume are intimately linked, and the interrelationship is a complex one, which is the reason TradeGuider "Smart Money" Tracker was developed in the first place. The system is capable of analyzing the markets in real-time (or at the end of the day), and displaying any one of 280 indicators on the screen to show imbalances of supply and demand.

Let's go ahead and look at some charts.

The TradeGuider "Smart Money" Tracker Indicators.

All of the indicators can be grouped into two broad categories: Indicators that show weakness are colored red. Weakness is indicative of supply, professionals selling the market, or professionals withdrawing from the market (i.e. no participation). Strength is indicated by green symbols and is indicative of market demand (i.e. professionals buying into the market or not selling as the market falls).

TradeGuider constantly analyzes your charts for imbalances of supply and demand or strength and weakness as it happens. Once an imbalance is found, a red or green indicator is displayed, alerting you to the likely strength or weakness in the market. This chart (link below) shows a number of green symbols, indicating strength (demand). Showing supply and demand graphically on a chart is one of TradeGuider's major strengths. In the chart below, we can see that following the cumulative effect of a build up of demand, the stock responds with a positive and sustained price rise.

This chart (link below) shows a number of red symbols in a strong short and medium term downtrend, confirmed by the bearish volume thermometer, indicating weakness (supply). The market falls because of the lack of interest from professionals as the price rises. We call this "No Demand." In a downtrend this is a great shorting opportunity. Here is an example of a TradeGuider chart in MetaStock 12.

Chart 1

Because TradeGuider works in FOREX, Stocks, Futures and Commodities, the actual markets we analyze for this document are irrelevant.

Now let's look at some specific Volume Spread Analysis indications of demand. (strength) Climactic Action, is another indicator variant that shows when buying is overcoming selling. A high volume down move, on a wide spread would normally indicate selling. However, if the next bar closes higher, closing on or near the top of the bar, then this shows that buying occurred on the previous bar. Only professional money can do this and it is therefore a good indication of strength.

Chart 2

Notice on this chart the ultra high volume activity on a down bar with the price close in the middle of the bar. This can only mean professionals are buying the market otherwise the close would have been at, or near, its low. The concept of climactic action, as with most VSA indicators, has different variations. By using the TradeGuider "Smart Money" tracker you will be alerted automatically to all variations as they appear, accelerating your learning curve. The next chart we'll look at will demonstrate what a test looks like. Tests, by their very name, are the professionals testing the amount of supply present in the market. When they test and there is low volume this clearly shows no residual supply and the market is likely to rise in the near future.

Now for an explanation of how TradeGuider can analyze FOREX charts to determine strength and weakness in both spot FOREX and Currency Futures.

It is important to understand that TradeGuider does not need actual volume but relative volume compared to the previous bar to give a VSA indicator. Volume in FOREX can be seen as activity, and it is this activity that TradeGuider picks up extremely well when using MetaStock.

Here is an explanation from Tom Williams, the creator of TradeGuider.

Q: How does the Tradeguider VSA principles work in Spot FOREX?

A: First of all you have to realize that the "Smart Money," or "Professional Money" is very active in the FOREX market. "Professional Money" as we shall refer to it here, can be trading syndicates, individual traders with huge capital, large financial institutions, certain funds such as 'The Quantum Fund operated by George Soros, and large institutional banks.

See further information in this letter from The Derivatives Study Center sent to The Commodity Futures Trading Commission in August 2000 by clicking here.

These individuals or organizations are very secretive in their dealings, as it is crucially important to keep their actions as invisible as possible.

Fortunately tick volume does work. Tick volume is added to the price movement on every price tick up or down, because one may deal in 5M while the very next trader only deals 500k, but we get one tick each dealer. Bear in mind the number one principle, that from the tick volume created, 90% will be from "Professional Money" and their dealers.

When these very large orders go through, they have a following, the same as the futures pits; this automatically creates more ticks, hence higher volume. So TradeGuider will analyze the tick volume as if it were real volume, and will clearly show this "Professional Money" either participating or just as importantly not participating in the movement of a currency. When we hear of strength and weakness in a currency, this is nothing more than professional support or lack of it, and can be clearly seen on the TradeGuider Chart.

Remember when in 1992 George Soros massively shorted the British Pound forcing the Bank Of England to eventually withdraw from the European Exchange Rate Mechanism, well, this is one very well known example of "Professional Money" having a dramatic effect on a currency. This happens every day, you just need to know what to look for. Check out this chart and see what the volume did in that famous move by George Soros:

Here's a famous example...

British Government no match for George Soros

In 1992 the British pound fell so sharply that Britain was forced to leave the Exchange Rate Mechanism (ERM). What do you think was behind this famous fall? Yes, you guessed it, professional money! The money in question was the Quantum Fund, run by the renowned speculator George Soros.

He and his analysts had spotted a potential weakness in the ERM. During the weeks before the massive sell-off of the British pound, George Soros was busy exchanging seven billion US dollars for German Deutschemarks.

When the time was right he moved in fast, selling the British pound. As the pound fell the Deutschemark rose, creating huge profits for Soros. As soon as the news broke the other professionals followed suit. The onslaught was overwhelming and too much for Norman Lamont, the then UK Chancellor of the Exchequer.

In an attempt to halt the slide Lamont resorted to selling some of Britain's gold reserves, he put up interest rates three times during one day, but this was still no match for the professionals.

The following is taken from the first 19 pages of the highly acclaimed book by Tom Williams – "Master the Markets." Here is some more information about this book. It WILL change the way you view the markets, so please take a moment to view these first few pages. The complete book has over 185 pages and the MetaStock "Smart Money" tracker software comes with a multimedia home study course that brings the book and plug in to life.

ALL MARKETS ARE DOMINATED BY THE BIG PROFESSIONAL PLAYERS

The banks, institutions and the specialists have all the financial resources to move prices up or down. Trillions of dollars are exchanged daily across the world's stock, currency and commodity markets. Hundreds of millions are spent analysing crop reports, business sectors and economic figures.

All other activity, including the combined trades of thousands of individuals like you and me, represents only a tiny fraction of the money and resources flowing in and out of the market on a daily basis.

You may think that's pretty obvious. But...

Markets don't react to professional activity the way you expect them to.

In every market, there's an undeclared understanding amongst professional traders. It alerts them to what the big money is doing. It's based around observations surrounding volume activity and the effect this has on the price and the spread.

To us outside observers this activity normally goes unnoticed - an insignificant and unexplainable blip lost amongst the 'noise' of the markets.

If you've ever watched the Dow or a stock price over any period of time, you'll know that prices can fluctuate wildly. But there is logic behind all this chaos and the professionals know exactly how to profit from it.

They know what the signals mean, yet only a tiny minority of non-professionals know what's really going on.

By using the MetaStock "Smart Money" tracker, you could be one of the trading elite...

As you'll see in graphic detail later, knowing how to read the market will allow you to take the professional's lead and boost your profits.

Understanding professional moves will allow you to uncover the true market sentiment. It will give you a clear indication of which markets you should hold positions in - whether buying or selling stocks, or going long or short on futures.

There's No Way To Hide...

You see, no matter what they do, the professionals can never hide their true intentions. They may be leading the market, but they leave tell-tale signs for anyone with the right knowledge to follow.

It doesn't take a great leap of logic to see how you could use this information to your advantage...

Ultimately it means that all other factors - including the fundamentals of a company, the management, the strength of the dollar and interest rates, simply aren't important in your analysis. Ditto for newspaper financial columns, investment journals, broker recommendations and television coverage.
The only truly important consideration for you is what the professional money is doing - that is the only thing that matters.

*** To see recent MetaStock chart examples of the specific market you trade and receive The Complete Volume Spread Analysis System Explained ebook at no cost just email ken@tradeguider.com and provide a contact number and we will be happy to assist you and answer any questions you may have.

About Gavin Holmes

Gavin has helped thousands of traders in over 36 countries learn how to track the "Smart Money" and avoid the tricks the "Smart Money" play. Gavin was taught to trade by veteran syndicate trader, Tom Williams, (now 78), and was fortunate enough never to have picked up the bad habits many retail traders suffer from.

Gavin is now based in Chicago in the US and regularly hosts seminars and events sharing his experience and knowledge developed through talking to hundreds of retail traders each month, most who are finding the markets a challenging environment..

Support Tip

How do I access the Power Console?
Contributed by MetaStock Support

The Power Console takes everything that is great about MetaStock and puts it in one convenient location. Now you can open a chart, start a scan, run a test, review reports, make custom lists, and more...from one full-featured dashboard. You can access the Power Console when you open MetaStock (Example 1) or navigate to it (Example 2). Here's how:

To access the Power Console when opening MetaStock:

1) First, open MetaStock. The Power Console will automatically appear.

To navigate to the Power Console in MetaStock:

1) When you are in MetaStock, look in the upper left hand corner for the box with a "P" in it. Click on the boxed "P".

Tuesday, November 20, 2012

Many traders complain about volatile markets. They see volatility as a problem, something that thwarts their trading and frustrates them as they try to short term trade. In their trades they encounter whipsaws, bounces, and reversals that cost them profits or worse, chronic small losses.

Many Options traders use implied volatility, or what I call compression patterns as a means of anticipating breakouts and sudden moves up or down.

Most of the time traders view volatility as a bad thing, something to endure and wait to end.

But instead of viewing volatility as something negative, you need to understand the why, how, when, and where of volatility. If you understand it, you will find that volatility is actually a powerful analytical tool that you can use to improve your trading, understand the balance of power between small lots and large lots, AND use it to enter stocks sooner with more confidence.

The WHY of Volatility:

Why does volatility occur? Is it just High Frequency Traders HFTs making a lot of fast runs? Is it Dark Pools creating problems for retail traders by trading over the counter off the exchanges? Is it caused by news and events? Or is it just some mysterious event that happens and no one can explain?

None of the above are correct.

Volatility is caused by very specific trade activity. It is not random, or chaotic, although it appears that way when you are in a trade or when you are looking at charts. It is actually a powerful, dynamic signal of a major change going on beneath the surface of the news, hype, media frenzy, crowd mentality, and trading room chatter.

To understand volatility and why it occurs, we are going to use an analogy most of you are familiar with, and have experienced some time in your life.

The ocean is full of currents, rivers, canyons, and riffs. It is also controlled by the moon’s gravitational pull, which all of you know creates the tides. There are counter movements, such as under ocean rivers, the ocean continental convergence, Arctic circumpolar currents and surface currents.

Tidal changes can be minor to severe. Extreme low tides are usually followed by extreme high tides. How close the moon is to the earth also factors in. So we have two factors affecting the waves that come to shore on the beaches you walk on:

1. Underlying energy caused by the structure of the ocean itself.
2. The moon’s gravitational pull, or outside influence that changes the tides.

The same is true of the markets.

There are structural aspects of the markets that cause under currents, rip tides, eddies, and shifts to waves like in the ocean. These deep market structural currents and movement are far below the surface of what retail traders and retail news sees and understands.

These deep structural market currents affect the overall market in ways that are not visible most of the time. These are mostly the giant lot institutions, hedge funds, and other buy side or sell side market participants.

Then we have the waves that occur in the stock market due to the smaller lots, smaller funds, and HFTs. These groups create the gravitational pull of the markets, creating speculative runs up and down due to highly emotional trading OR due to huge volume flow on the millisecond.

It is when these two levels of the market collide that we encounter volatility.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.

Monday, November 12, 2012

Last week we discussed the High Frequency Trading Companies. This week we will examine their counterpart, the “Dark Pools.” These giant share lot orders have always been a part of the market. It used to be that these large lot orders were shown mostly on the market maker limit books, held back from the general exchange activity until price was at their preferred level.

Dark Pools are also called “icebergs” because most of these huge lot orders have moved off of the exchanges. There are about 20 Dark Pool systems that provide the service of order processing for the Dark Pools.

Who are the Dark Pools?

These are the largest of the Mutual Funds and Pension funds. Their typical order size is 100,000 – 500,000 and their intent is to purchase millions of shares of stock over a lengthy period of time. These are not HFTs, or day traders, or intraday professionals. Dark Pools represent the long term institutional investor who uses fundamentals, quantitative analysis, and portfolio management to choose the stocks and the quantity of shares they intend to hold for the long term.

Some purchases are for Charter requirements, others are discretionary to fulfill a specific requirement of the portfolio they are managing. They have hundreds of billions of other people’s money to invest on their behalf.

These giant trades used to be seen on a retail traders day trading platform but not any longer. These huge trades now are done totally off the exchanges.

Why did the Dark Pools move to over the counter transactions? Is it legal? Is it fair for retail traders?

It is legal. The laws of the US only require that every transaction be recorded, documented, with transfer of title, and that this all be sent through the National Clearing House by the end of the trading day. This insures that every transaction where stock is bought or sold is recorded with price, time, and quantity of the trading entities and the close of the transaction. Like all over the counter transactions, not using an exchange has some drawbacks and some benefits.

Nowhere in the law is it required to do a transaction via an exchange. The exchanges only make it easier for buyers and sellers to come together. HFTs of course are not happy about these off the exchange transactions because they want to move price up ahead of the Dark Pools giant orders.

The Dark Pools represent the largest sum of money in the US, pension plans and mutual fund investors. It is imperative that these huge funds are able to buy stock or sell stock at the price level they deem the best for their fund holders. When an HFT drives price upward or downward as a Dark Pool is trying to buy or sell, this hurts pension holders and mutual fund investors because the Dark Pool is forced to buy or sell the stock out of the range the manager determined was an ideal entry.

This is why Dark Pools have become more and more popular with the largest funds investing in the US markets. These funds represent about 8-9% of the total trading and volume in the markets, both on the exchanges and over the counter.

HFTs create far more volume activity but are limited in scope in terms of longer term price movement.

Dark Pools are here to stay. They are not harmful to retail traders, however day and intraday retail traders need to be aware that not all of the volume and activity is now visible to them. So this is the second disadvantage to trying to day trade in the electronic marketplace. HFTs are able to trade on the millisecond, creating advancing prices that can hurt retail sales.

Dark Pools DO NOT move price or volume as the HFTs do.

Dark Pools however DO show up on end of day charts, IF you are using a VOLUME based accumulating/distribution indicator that can expose what side of the trade the giant Dark Pools are on.

The chart below is an example of Dark Pool activity as a stock bottoms and moves sideways in a platform pattern. Eventually HFTS and other professionals will discover the iceberg beneath the exchanges and rush to drive price upward.

Therefore, entering with the Dark Pools is something all retail traders must learn to do. Using price and time indicators is no longer enough. These indicators are not designed to expose Dark Pool activity which does not move price. Since Dark Pools do not move price, alternative hybrid indicators that do expose Dark Pool quiet accumulation must be used.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.

Monday, November 5, 2012

HFT or High Frequency Trading has become a hot topic of late in retail news. It is important that retail traders understand exactly what a HFT is and what it is not, as well as how the HFT trading affects price so that you can be ready for the impact the HFT trading has on stock prices.

HFTs are a computer program. This computer program is based upon a formula that is designed by a Quantitative Analyst who is not only a high level programmer but also understands the financial markets. The goal of these automated computer generated orders is to move price, so that the faster trading can take advantage of the speculative action that follows.

HFTs trade on the millisecond. However Retail Traders are only permitted by SEC rules and regulations to trade on the minute timeframe. Your order by law must be filled within 90 seconds of receipt by the exchange. Many times your orders will be filled by your broker out of their own inventory, which is legal but can lead to poor fills due to slippage.

The HFTs trade on the millisecond. What that means is they trade 1,000 times per second or 60,000 times a minute which is your timeframe. If your order is executed within 90 seconds, the HFTs could have traded 90,000 times in that timeframe.

HFTs therefore have a decided advantage in terms of you trading against them. What you need to learn is how to trade WITH HFTs, getting in just before they move up price suddenly with long high point gain candles and huge surges of volume.

Chart 1

The IBM chart above has had several HFT big gains, with high volume days in the past few months. This is a big name company and HFT Quantitative Analysts know that cluster orders can be found wherever large numbers of smaller lots are buying or selling. By instigating either buying or selling prior to market open HFTs gain control of price for that day.

Usually smaller funds, retail traders, and small lot investors chase the HFT action which is highly profitable for the HFTs but often a losing trade for retail traders.

Identifying HFT patterns on a chart is the first step to understanding how to exploit their activities. When you can learn to enter before a HFT trigger order run, then you will be able to ride that run up for the day and take good profits.

Since liquidity is very high on this huge volume days, exiting is simple.

What you do not want to do is chase the HFT run up, because you will encounter whipsaws and losses due to their lightening fast trades that you are unable to see even if you are using a retail day trading platform.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.

Monday, October 29, 2012

Last week we discussed the flaws and risk of a data set that has encountered a significant shift or change for Back Testing theories. Another good example of a major change of market structure that skews the data set and thereby giving false readings on Back Testing is the elimination of the “Uptick Rule.”

In 2005 after intense lobbying by special interest market participant groups, the SEC agreed to run a pilot test program on a few big blue chip stocks to see whether the Uptick Rule for selling short should be eliminated.

The Uptick Rule had been in place for decades and had been part of the reform of the stock market after the catastrophic collapse of 1929. The Uptick Rule for those of you who are new, required that the price of a stock “tick up” before any sell short order could be executed. The theory behind the Uptick Rule was that this prevented massive sell-offs that plummeted the price of a stock in seconds, as occurred in the 1929 stock market crash.

The argument from some market participant groups who actively traded short term, was that the Uptick Rule was an outdated rule that was no longer needed due to the huge volume and liquidity that the new market participant groups provided.

The test was run for 6 months and at the end of that time the SEC did eliminate the Uptick Rule for selling short. But alas, there were problems in the test study.

First of all the group of stocks chosen were big blue chip stocks, and not any small caps. Blue chip stocks are held for charter by many mutual funds and pension funds, and are held in trust by hedge funds, other funds for ETFs, and other derivatives. So the bulk of the institutional holdings for blue chip stocks are long term holds. Smaller lot investors also tend to hold these stocks for the long term. So the actual amount of short term trading, including selling short is significantly less percentage wise than a small cap stock.

The conclusion that the Uptick Rule was no longer necessary due to the high liquidity of the markets was a flawed due to the lack of inclusion of smaller cap stocks.

In addition, the market conditions at the time of the testing period were not speculative. The market was in a platform market condition with most stocks moving sideways in tighter action. This too affected the conclusions of the test.

Since the elimination of the Uptick Rule massive sell-offs have occurred. The most notable was the May Flash Crash of 2010 when a HFT algorithm went haywire. And again in 2012 with the Knight Corporation trading disaster of bad trade executions, that nearly bankrupted Knight in a few minutes.

Although curbs and other regulating computer generated monitoring are in place, the fact remains that the Uptick Rule elimination has caused the sell side of the market to experience steeper and faster price action.

This one change has had a ripple effect across the stock market. You can see it in the charts, and you may experience it in your trading.

The SEC always uses “Forward Testing” and is currently testing a new sub-penny order processing created by the NYSE for retail traders. But unless the data set is complete and relevant to current conditions, it can be a flawed test.

“Back Testing” is far more flawed in concept and scope than “Forward Testing” because it includes data that is no longer relevant due to massive changes in market structure. Be careful when you use Back Testing, to only include relevant data in your data set.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.

Monday, October 22, 2012

I was a speaker at the Las Vegas MetaStock Users Conference on October 13th. During my training session a couple of important questions were asked by the attendees that I did not have time to answer to my satisfaction.

I am going to answer those questions here in this forum so that everyone can read the answers.

Question posed: There is a study out that used “Back Testing” to derive a theory about where the institutions are buying the heaviest. The theory was that since 52 week highs had higher volume, that this must be where institutions buy into stocks.

My answer to that question was no, not in the current market conditions with the current market structure. The person asking was bewildered as he believes that back testing is irrefutable evidence. But there is an obvious flaw in the theory most traders are unaware of, due to a lack of understanding that has occurred regarding the market structure in recent years.

What is immediately apparent to me as a cycle theorist, is a critical error in the original back testing data set.

An absolute rule in science and cycles is that in order for an accurate test of any theory, the data and conditions must be relatively consistent and the same throughout the entire set of data. If conditions alter during the data set used, then the testing method and theories will be skewed and inaccurate.

Let’s examine the Back Testing Method first to determine if indeed the back testing supplied an accurate set of data on which to make this assumptive theory. The question I am posing then is this, “Did the conditions of the stock market, the market participant groups, the number and type of groups, and how they bought and sold stocks remain constant for 40-50 years back in time from today?” A major change during the period of time, will cause the data to be skewed and the back test results inaccurate.

If we go back in time 50 years from the year 2012, we are starting the test data around 1962. In that decade, the Dow Theory of 3 market participants was still intact. The informed investors which are the investment banks, wealthy individuals, and corporations controlled about 50% of all the market activity. Mutual Funds were just beginning to be popular again, after the huge Mutual Fund debunking in the 1920’s when Mutual Funds were first invented and sold heavily.

In the 1970’s the markets were stalled in a wide range bound pattern going nowhere. Mutual Fund investing slowed, but the market participant groups remained intact as Charles Dow’s theory had stated.

There were no pension funds allowed in the market in the 1960’s and 70’s.

That means that 50% of all the activity in the market was the small lot investor and odd lot investor. Remember there were no day traders, no retail traders, no small funds, no HFTs, no institutional traders as there are today. Investing was mostly long term. The Dow Theory clearly defined that the informed investors which are the banks, corporations and wealthy individuals started the bull market, and the buying by the average and odd lot investors was toward the end of the bull market.

By the early 1980’s Pension Funds had finally won their battle with Congress and pension funds entered the stock market. This created the bull market of the 80’s and it changed the matrix of the market participant cycle. However these were all still long term investments with very limited and constrained short term trading for all fiduciary funds. That means all during the first 2 decades of the back testing for the theory was primarily long term investing either by a fund or by a small investor.

The ratio of 50% informed and 50% uninformed held into the 80’s, so for the first 2 ½ -3 decades the data set is reasonably accurate for back testing up to that time, but then in the late 80’s changes commenced.

In the late 80’s and early 90’s floor traders took PC computers and started trading against their market maker employers. They became the institutional and professional traders market participant group we know today. Their short term trading activity did not alter the balance much, perhaps 2-5% at most.

In 1990 there were still no online brokers, or short term retail trading. It was all professional floor traders who had access to the exchanges and understood how the intraday action worked. At this time the speculative activity of the markets increased to some extent. Small lot investors began to lose market share. Their activity dropped from 55% of the daily market activity to 45%. The shift of balance between the “informed” and “uninformed” had started. What once had been an evenly balanced market was now more professional activity than average investor activity. Volumes started to increase in 1994 as PC computers and online brokers became popular.

But it wasn’t until 1998, a pivotal year for the stock market structural changes, that the balance between the average investor and the professional aka “informed” side of the market shifted dramatically. In the Roth IRA Bill was a little known rider that eliminated the “Rule of 3” that had been in place since the pension funds had been allowed into the market. With the elimination of the “Rule of 3” and the deregulation of the banks merging commercial and investment banking, the entire market structure changed almost overnight.

Now the balance between the professional side and the average investor/retail trader shifted even more, with 70% of the market activity now professional and 30% average investor/retail trader. The high volumes of shares traded on stock charts that can be seen during the 1998-2000 are dramatic. In addition there are now 8 levels of Market Participants, far more than the three Dow identified.

By 2005 High Frequency Trading had begun adding the final 9th Market Participant. This encouraged more Dark Pool activity which is an off the exchange transaction by giant funds, the largest funds in the market. Dark Pool activity does not go through the exchanges but is done “Over the Counter.” These are the largest orders used by any market participant and this is another major change to the market conditions and structure. In doing so, the professional side of the market dominance increased to 80% while the average investor and retail trader activity dropped to 20%.

The initial analysis of the data set, therefore provides clear evidence that the data set included in the back testing theory of 52 week highs as a buy entry point for institutions is flawed. Conditions, market structure, and market participants change significantly during the data set period, which has skewed the statistics for this theory. The data set used is not reliable due to the major changes in the market structure from 1998-2012. These changes were not small or insignificant, these changes altered the entire market structure including, how orders were processed, and the volume activity on which the “Back Testing 52 Week High Theory” was based.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.

All too often retail traders are either chasing stocks that are already running, or having a knee jerk reaction to news, events, or sudden price shifts.

To be consistently successful a retail trader needs to learn to anticipate price action BEFORE price actually moves. That means setting aside the notion that price indicators are the most important indicators to use.

In today’s automated market with Dark Pools, High Frequency Traders and other automated orders triggered by computers rather than humans, patterns form that volume and accumulation/distribution indicators expose that are not visible in pure price and time indicators.

The stock chart below is a good example. DIS has been in a moderate uptrend, very sustainable for many months. This actually was a wonderful position hold stock rather than a swing trade due to how price behaved.

Chart 1

Price looks like it could continue up indefinitely and price indicators are still confirming upside action. However, there are subtle signals in volume and accumulation/distribution indicators that warn before price starts to weaken, that the upside is moving on smaller lot activity versus giant fund accumulation. Whenever this occurs entering the stock is higher risk, because the smaller lots have limited buying power and their buying is often at highs and speculative in nature. That triggers HFTs and profit taking which can result in a steep retracement or correction. The weakness in volume based indicators are rounding tops, lower highs, and weakening volume patterns.

The short term trend has weakened and is moving sideways, as volume entering the stock is now predominantly smaller lots. Large lot activity subsided a while ago and TTQA is exposing smaller funds buying.

Understanding who is in control of price will help you choose better entries and avoid high risk trades. This stock is shifting sideways due to a weakening of volume and accumulation/distribution patterns. Quiet accumulation ceased some time ago.

The risk now is from profit taking by larger lots who entered at the bottom. As smaller funds rush to buy due to sell side market participant recommendations, the dark pools may decide to take some profits.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.

Any time I hear a trader say they don’t use stop losses because they “don’t work” I know immediately that the trader is using one of the old-fashioned, outdated stop loss strategies.

As a trader you need to remember that the stock market and all the other financial markets are continually evolving, changing as they adapt to new technology.

In the past decade there has been unprecedented technology changes to the internal structure of the stock market. That has caused changes to the Market Participant Groups, and its cycle has changed due to the new groups that have emerged that were not present a decade ago.

So you really need to consider if the information you are getting from the internet, websites, gurus, news media, technical analysis books, periodicals, etc is CURRENT or outdated.

One of the most common problems retail traders face is that they are unwittingly using outdated theories, strategies, and trading systems. If you are having troubles with stop losses then you are either using an outdated strategy OR you are not setting the stop loss properly for your trading style, the trading strategy you are using, and the chart patterns for that stock.

In the “old days” when retail trading first began and online brokers first emerged on the internet providing online trading services to mostly day traders, a percentage stop loss was promoted.

This came from the even more archaic stop loss approach used in the 20th century for longer term investments.

In those days, there were no PC computers so there were no charting programs like we have today. The stock market was a fundamental market, so a percentage stop loss for the average investors made sense. Since no average investor had even heard about technical analysis, a percentage stop loss was the easiest way to protect the investor from a catastrophic loss.

Nowadays, a percentage stop loss merely invites whipsaw action due to those who use that common and popular stop loss strategy to trade against you.

The most popular stop loss percentages were either 8 or 10%. Since only a scarce few professionals were using technical analysis, these stop losses worked reasonably well during the 20th century but for most retail traders nowadays percentages pose huge risk. In fact the percentage stop loss increases risk because there are Algorithms searching for such cluster orders.

Cluster orders are orders that ‘cluster’ around a certain price point unnaturally. These are prime targets for automated orders based on algorithms designed to find these clusters and trade against them.

Let’s use IBM a company that is ever popular and with which most every trader is familiar.

Where should you place your stop loss?

Archaic convention says 8-10%. So let’s use the 10% to be “on the safe side” or more conservative.

That would put you at about 185-186 right smack in the middle of the sideways action. If the stock retests the short term low, then your stop would be taken out as so often occurs.

Chart 1

For longer holds you need to be under strong support, not above weak support where the 10% stop loss places you. You are smack in the way at 10% and yes your stop would be taken out on a sudden collapse of this stock.

For a long term hold the support level is actually way below where the first round of quiet distribution occurred, way down around $150.

Percentage stop losses are an outdated antiquated strategy. If you are still using this old-style stop loss you need to update your methodology. Use a current stop loss technique that works with the modern automated marketplace, the more diverse groups of market participants, and the technical as well as fundamental aspects of trading.

If you are a technical trader and you are using percentage stop losses, you are using a fundamental method for stop losses. The two do not go together.

If you don’t use stop losses at all OR worse “have it in your head,” then you are gambling.

At some point, you will take a catastrophic loss.

Stop losses are part of trade management, risk management, and common sense trading.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.

One aspect of changes to the Market Structure that many retail traders do not realize is that internal operations, procedures, market participant groups, order processing systems, changes to order execution, SEC rules and regulations on trading, etc. change due to new technologies. The financial markets have been adopting new technologies over the past several years, AND there have been numerous changes to rules and regulations by the SEC and Congress. These changes affect the price patterns you will see on a chart.

Often times, retail traders are stuck back in the 1970’s - 80’s with outdated technical analysis patterns that either have changed dramatically due to all the changes in market structure, OR do not form often anymore.

As the markets change and adapt so too do the millions of people who buy and sell stocks. One area that has changed dramatically in recent years is how, when, and where bottoms develop, complete, and their patterns.

It used to be that you could count on the basic bottoming patterns from the early technical analysis books written 20-40 years ago.

Inverse Head and Shoulder bottom

Bowl bottom

Triple bottom

Double bottom

V bottom

That basically was all the bottoms that formed. But in recent years new forms of bottoming patterns are emerging along with the traditional bottoms. As a retail trader, it is critical to also be able to recognize these both to avoid selling short in a bottom AND to be able to reap the potential profits of the fast runs out of certain types of bottoms.

The chart following is just one example of a new kind of bottom formation. It is actually a platform, which is a very precise sideways pattern with consistent highs and consistent lows. Price falls rapidly to a low, then the sideways action commences with highs and lows that stay within a precise and narrow range. This differs from a bowl shape as the bottom is not round. Nor is it a double or triple bottom, which are wider ranges in price and have inconsistent highs and lows. This precision style bottom is actually more of a U shape, a variation of the V with the same velocity and momentum action on the down side and upside. This one happens to also have gaps which are far more common these days than in years past.

Chart 1

All of these changes have occurred due to the different market participant groups, how they buy stocks in bottoms, and which market participants actually create this kind of bottom.

With the advent of Dark Pools, the off-the-exchange and over the counter large lot order processing trading platforms, this type of bottom is becoming more common. It is easy to miss during its development and many times swing style sell short traders may assume the stock is going to head down further, when they should actually be trying to enter prior to the move up.

Recognizing the new technical patterns that are forming in the modern automated marketplace is a critical aspect of keeping current with what is going on in the stock market. Technical analysis and technical patterns will continue to change as the market structures change.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.

Monday, September 24, 2012

One of the dilemmas that a retail trader faces is holding a stock as it heads toward resistance. The questions always arise, will the stock retrace, correct, or move sideways?

Where a stock stops, the volume patterns, flow of funds, and consistency of quiet accumulation help determine what the stock will do next.

IBM is at a point where it has run up nicely on a swing style run and is at a resistance level. The resistance above its current price, is all time high resistance from earlier this year.

The questions most traders have are whether this is the end of the run, OR will IBM move up beyond that all time high to form a new high.

Chart 1

Volume is stronger to the upside and weaker to the downside, indicating that the selling is profit taking on a light mode. The pattern is a consolidation and the stock is holding to the weak support lows.

The TechniTrader® Volume Accumulation TTVA indicator in the middle chart window, is dipping slightly down as is normal for a profit taking phase. The TechniTrader® Flow of Funds TTFF indicator in the bottom chart window, is not extreme and has risen as the stock has moved up.

All volume indicators point to strength. The bottoming pattern is a short term inverse H&S, which can be a strong bottom formation especially on a short term. Prior consolidations are offering support also for fundamentalists considering this stock.

Remember there are 2 major factions in the stock market:

The fundamentalists that account for 70% or more of the market action. These are the funds and institutions, both sell side and buy side market participants. They are searching for what they consider “bargains” based on future growth of the company.

Technical Trades who use stock charts to determine a good entry.

Often retail traders totally forget about the fundamentalists or consider them unimportant. However since they dominate the market being aware of their activity is important. How and when they are buying helps you understand what the technical patterns are telling you or are revealing.

To be an excellent chart reader you must be aware of the fundamentalist component and use indicators that not only evaluate price but also evaluate quantity, as it is in quantity indicators that fundamentalist activity is best displayed on the chart.

Chart 2

IBM has been moving up steadily for some time but is not at market saturation. Rather it is building a foundation for new technology and growth. The recent sideways trading range pattern for IBM was due to the heavy acquisition mode it has been in for over a year now.

The TechniTrader® Quiet Accumulation TTQA indicator in the bottom chart window, shows that even during the trading range period the buy side institutions held.

When looking at a chart you must always ask yourself, “Who is in control of price?” Which of the 9 market participants control price at this level? What is their intent for buying or selling? How do they affect price action near term?

When you have the answers to these questions determining whether a stock is topping or simply correcting, or bottoming and preparing for the next stock value increase becomes easier.

Technical patterns can tell a retail trader far more than most traders realize. By understanding the driving force behind the different patterns, you will have a far better analysis of what the stock will do next.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.

Wednesday, September 19, 2012

With the Market Structure changes that have occurred in recent years, many old-style technical patterns are disappearing and new patterns are emerging.

These new patterns are most obvious on the short term trend. This is also the trend time frame that most retail traders use to trade short term for monthly income.

One big change recently is how bottoms form.

Most retail traders have learned about the W bottom, Triple Bottom, V bottom, Bowl shape aka cup, and the inverted head and shoulders pattern.

A common bottom that is occurring these days is a basing pattern where the stock moves sideways for a period of time building more of a platform, than wide sideways pattern that creates the W’s, triples, and Inverted Head and shoulder bottom formation.

This is a sideways pattern that is wider than a consolidation, but is not a trading range as is normal to create the technical bottoms you have learned.

A platform is distinctly different than a Trading Range.

A Trading Range has varying highs and lows with numerous inter range lows and highs. The inconsistency of the trading range sideways action makes it extremely challenging to trade unless the range is very wide, 10-100 points as an example.

The Platform is often a “gottcha” for swing traders who are either trying to trade the short term runs within the platform, or are still trying to sell short even while a bottom has commenced. The problem that faces most traders is the fact that the basing platform, doesn’t resemble any bottom they have learned from the older style technical analysis so prevalent around the internet.

Since most traders are using out-dated technical analysis as the basis for their trading, they are handicapped and have lackluster results that are disappointing and frustrating.

Chart 1

FFIV is a technology stock. It is also a leader in the Cloud Industry which is causing more giant to large sized funds to double up on its stock. It had a period of selling earlier this year as it reached a new high. Now it is forming a base as its bottom. There may be sufficient points for this $100 dollar stock to trade the runs within the platform however, at some point this stock is going to move suddenly. Indicators show quiet accumulation along with intermittent HFT activity.

Chart 2

TTVA shows it reached an extreme pattern of volume before commencing this basing bottom formation. Meanwhile money has been flowing into the stock steadily over the summer.

Chart 3

The TTRSI shows that the base is starting to gain energy and is starting to compress. Compressions tend to lead a sudden move.

Chart 4

The weekly chart shows that the base is forming at a prior low well above the severe, extreme low of the 2011 dump when politics caused stocks to fall abruptly.

Basing patterns for bottoms are becoming more common. They form at prior lows that are higher than a severe low, especially if that severe low was caused by something beyond the scope of the company and its business.

Basing patterns often show energy and bias within the pattern exposing giant fund activity before the stock moves. Typically it is High Frequency Trader activity that causes the sudden move out of the base.

Bases can last for several weeks to months. The key is to have all the indicators that expose dark pool activity lining up.

Dark Pool activity is very easy to see on the charts because of how they buy into a stock, accumulating incrementally within a tight range over an extended period of time.

This consistent buying pattern is what creates the basing bottom formation. Since Dark Pools funds can control price precisely, the wider Ws, Triples, H&S, do not form as easily when the Dark Pools are active.

Learning the new subtle changes to technical patterns is crucial for your success as a retail trader. Your advantage in the market is your ability to see the footprints of the other market participant groups, and then trade accordingly.

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As the market would have it, most participants are wrong in their trading decisions and therefore lose money when they invest or trade. We (as professionals who work in the business every day) know that even though what most dedicated people do is correct.......sometimes they miss the critical ingredient known as "volume".

Volume is the catalyst behind the most explosive and profitable moves in trading any instrument within any market place, and to this day still remains the number one factor that determines the probabilities of future price directional price movement. Volume is the number of shares or contracts traded over a calculated period of time. The result of those volume numbers must then be used to determine the current and future Supply and Demand ratio of what we are analyzing.

A professional trader will focus his or her attention on the Smart Money Volume. This volume is the most important type of volume. It is created by the people who actually move The US Markets and more importantly, The S&P 500 E-Mini futures from one level to another. These are the heavy market participants including off shore hedge funds, US based institutions, major market makers along with specialists on the trading floor who will orchestrate the mechanics behind the new price move, before the general public is aware of what is about to happen.

The effect of what the Smart Money does now creates a new level of supply or demand that was previously non-existent.

Where the ratio of supply and demand changes, so do the opportunities to invest or trade in anticipation to make money (whether long or short). However, without a sufficient amount of accumulated volume incorporated into the analysis of our trading decisions, we leave a reward to risk ratio on the table that is unacceptable. Let's examine the various scenarios where volume, especially a near historical volume spike or accumulated volume levels, plays a critical role in the end result of being on the right side of the markets and ultimately, a winning or losing position. Understanding that our US Markets are highly correlated, and that we must know the current state of our Markets, we begin with a chart of the Dow Jones Industrial Average.

Chart 1

The Basic Scenarios of Volumes True Colors

Excessive volume levels occurring at major turning points in the S&P 500 E-Mini Futures Market, stocks, subgroups, parent groups, their assigned Sectors, and the Major Market indexes, gives us the opportunity to get in at the beginning of a change in direction with the potential for profit that no other trading method can offer. For example let's consider the following example:

Trader A with 5 years experience finds a real time S&P500 E-Mini futures trade set up from a free or low cost internet program that has several favorable indicator formations and increasing positive volume. Trader A has considerable experience using Technical Analysis and believes there are strong possibilities for short term upside potential price movement. Trader A now analyzes the current state of the overall market and concludes that his/her timing is correct and now decides to trade the 5 E-Mini contracts in isolation. Trader A selected and traded a sub standard trade because of a critical failure to make a relative comparison between the E-mini trade that he/she will make and the "daily price levels in combination with proper volume analysis."

Chart 2

Successive volume spikes or sustained and consistent volume levels allow the trend to continue in the same direction until the trend has exhausted itself.

Where short term corrections within an uptrend present themselves, volume will have temporarily dried up and prices will stall and reverse because of the inherent change in the demand/supply ratio- supply has now become clearly in control. This normal correction will last a short period of time until more buying pressure shows up again in the form of volume to act as the engine behind the renewed continuation of the uptrend.

The exhaustion of an uptrend is almost always evidenced by a drying up of volume leading to a reversal pattern where the entire process is then repeated but this time leading to a down trend.

As traders we have a clear choice in front of us to either choose to trade the candidates that have significantly higher volume levels or not. In choosing average volume level candidates, the statistics will quickly point to substandard trading results. This is a direct result of a lack of serious interest in the security or futures contract for the simple reason there is no real Smart Money buying behind it. No professional trader would make a valid risk to reward calculation before a trade is made without including volume as a serious portion of that equation.

Chart 3

The MACD is one of the best indicators to analyze and make trading decisions because of its inherent ability to confirm the trend has now officially changed from one direction to another. Although at times it may lag price movement, its most powerful attribute is the confirmation it will provide us when prices achieve a new pivot point high or low or even a new base formation, and then move up or down from there into a new direction. This provides the confirmation that the probabilities of a new trend are present and we need to start paying serious attention to the trade on our watch list.

Chart 4

IF MONEY FLOW is now included in our end of day analysis to determine the validity of the volume that we have now identified; it can provide us with a looking glass effect to determine whether or not that volume is in fact a real institutional and insider buying or not. Can you imagine how your confidence level would change knowing that what you have found has the people behind it that actually move prices from one level to another? This is the skill level that we must invest in and train ourselves to arrive at, now working every day in anticipation of finding, tracking, and trading with these Smart Money market players.

With all the trading platforms available today is it easy to be swayed off course. By taking the necessary time to educate yourself on the most important aspects of professional trading it becomes second nature to spot turning points leading to the possibilities of a new trend, the tracking of a trend and most importantly a futures contract or a stock that is waiting for a substantial upside move. The critical nature of volume in this case being "a historical volume spike or accumulated volume level identified at precisely the right time" guides you to the true high probability trade vs. Trader A who will continue to make substandard trades and never know the inner workings of what really moves prices from one direction to another. The obvious question to ask yourself now becomes have you been trading on the A side or the B side?

Waiting and trading with the correct volume level will put the risk/reward ratio greatly in your favor. Your best positional advantage as a trader or investor is patience. It is always better to wait until a significant or even historical volume level arrives before putting on a serious position. This basic tenant has applied to the majority of the biggest moves in the history of the securities market and still stands today as the mark of a professional trader. Volume is our trading edge and puts it all in our favor. Once we learn how to employ its edge, we cross over to an entirely different level of trading and investing.

You can learn more and subscribe to "THE NIGHTLY MARKET INTELLIGENCE REPORT"™ by clicking here.

About Jeffrey Kilian

Jeff Kilian is a 13-year veteran trader/technical analyst who uses only technical analysis to make all his own trading decisions. His communication skills are what clearly set him apart from others in the educational side of the securities business, allowing him to teach in a clear and easily-understood manner.

By following a structured, learnable, and repeatable process, his clients learn in a fraction of the time what it takes to become a real life professional and profitable trader.

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